WSJ: S&P Downgrades Portugal, Greece

MARKETS|MARCH 29, 2011, 3:31 P.M. ET
S&P Downgrades Portugal, Greece

By GEOFFREY T. SMITH

LONDON—Rating agency Standard & Poor's on Tuesday delivered a damning verdict of the euro zone's new plans for resolving sovereign debt crises, downgrading two of the euro zone's most troubled member states.

Citing fears that the two may have to restructure their debt and force losses on bond holders after 2013, S&P pushed its rating of Greek sovereign debt down further into junk territory, cutting it by two notches to double-B-minus from double-B-plus.

It also cut Portugal's senior debt rating by one notch to triple-B-minus from triple B. It had only last week downgraded Portugal by two notches, and the country is now on the verge of losing its investment-grade status for the first time. The outlook for both countries' ratings remains negative, S&P said.

S&P said it is "highly likely" that Greece will have to access official assistance after 2013, when the current European Financial Stabilization Facility is to be replaced permanently by the "European Stabilization Mechanism".

The key difference between the two is that the ESM will foresee the likelihood of asking bondholders to accept losses before taxpayer-funded help is extended. S&P noted that this structure is "detrimental" to private creditors of both countries.

Greece has already accepted a three-year plan of emergency help from the EU and International Monetary Fund, while S&P expects Portugal to ask the EFSF and IMF for a similar package soon.

The downgrade comes after the Bank of Portugal on Tuesday cut its economic growth forecasts for this year and next and said substantial measures will be needed to meet the government's deficit-reduction goals.

In its Spring Economic Bulletin, the central bank said it now expects gross domestic product to contract this year by 1.4%, more than the 1.3% contraction it forecast in its Winter Bulletin. It also cut its GDP growth forecast for 2012 to 0.3% from 0.6% previously, partly because of the effects of the government's deficit-cutting measures.

These forecasts only take into account the deficit-cutting measures that have already been put in place, the bank said in the bulletin.

The government proposed earlier this month a series of additional austerity moves intended to reassure markets that the deficit will fall to 4.6% of GDP this year and 3% of GDP next year, from about 7% in 2010, according to the government, and 9.3% in 2009. The measures were blocked by parliament, precipitating the resignation of Prime Minister José Sócrates. President Anibal Cavaco Silva is expected to call new elections in the coming days so that a new government can be formed.

The Bank of Portugal warned that more will be needed to slash the country's deficit. The current budget-reduction measures already approved "don't reflect all the measures necessary to meet the demanding budget goals" set by the government for 2011 and 2012, the bulletin said. "In 2011 there are still not-negligible implementation risks that arise from, among other things, a degree of budget reduction of an unprecedented scale," it said. "In 2012, the additional measures of a permanent character that are needed to reach the deficit goal set by authorities are of a very substantial dimension."

Portugal's private sector, including its banks, need to reduce their debt levels, which will also affect financing conditions and economic activity, the bank said.

Greek Prime Minister George Papandreou blamed the EU for the latest in a series of steps that have left without an investment-grade rating from any single agency.

"S&P is downgrading Greece not because of what Greece is doing," Mr. Papandreou said. "What they are saying is that the decisions of the European Union are not enough, or they are in the wrong direction."

Under the EU's text, all debt issued by euro-zone states after the middle of 2013 will be clearly subordinate to the claims of the ESM. However, many market analysts think that already-outstanding debt will also have to be restructured to bring the two countries back to a sustainable debt position. S&P sees Greece's sovereign debt peaking at over 160% of gross domestic product in 2013.

"The pre-conditions of the ESM, against the background of Greece's hefty government debt and high borrowing needs, undermine Greece's plans to resume commercial borrowing by mid-2013, when the EU/IMF program of official financial support terminates, and increase the likelihood of debt restructuring," S&P said in a press release.

S&P is the first rating agency to react to the official ratification by EU leaders of the ESM's establishment from 2013 onwards. The move had been widely anticipated, especially in the absence of any new euro-zone initiatives to make the two countries' debt loads more sustainable.

A European Central Bank spokesman declined to comment, but the bank has been sharply critical in the past of ratings agencies' "pro-cyclical" behavior, which it says merely exaggerates the prevailing market sentiment.

—Jeffrey T. Lewis contributed to this article.
Write to Geoffrey T. Smith at geoffrey.smith@dowjones.com

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